GCC currency pegs to the dollar are expected to remain in place, Samba has said, although the financial group noted these remain under pressure in the region compared to historical standards.
“Pressure on the riyal has abated from its early-year intensity, but has not gone away. Speculators are wondering whether local banks have the capacity to absorb sufficient amounts of government debt to relieve pressure on international reserves,” Samba said in its latest ‘GCC round up’. Samba’s view is that the “most intensive” period of government debt financing has probably passed, and with fiscal buffers still sizeable, the peg is expected to remain in place.
More generally, it said GCC governments are now more willing to draw on some of their large external savings held in sovereign wealth funds, although data on such actions are not publicly available.
According to Samba, GCC economies continue to adapt to the new low oil price environment, with a focus on cutting capital spending, and pressing ahead with reforms to subsidies and measures aimed at raising non-oil revenues.
The pace of fiscal consolidation varies between countries, as those with larger fiscal buffers take a more gradual approach in order to limit the impact on growth.
However, economic activity in all countries is slowing and overall GCC growth is projected to dip under 2% this year, before reviving to around 2.5% next year.
Despite diversification and fiscal consolidation efforts, the outlook for the GCC will remain heavily dependent on developments in oil markets, the report said.
Oil prices have been volatile as markets look for a clear sign, or otherwise, that fundamental balances are tightening.
Surging Opec production and signs of resilience in non-Opec supply, suggest this will take longer than expected, and we have revised down our price projections for 2017-18.
Sustained low oil prices have led to a weakening of fiscal and external positions, and pushed a number of GCC governments into large borrowings to fund deficits and support spending, Samba noted.
Last year, the focus was on domestic sources of finance, but the mix is now shifting to incorporate greater recourse to external funding and draws on large external assets.
In a global low interest rate environment, investors have happily absorbed large sovereign bond issuance from the region this year, and more is expected as Saudi Arabia prepares its first bond issuance.
The collapse of oil prices has led to some elevation of risk perceptions of the GCC states, though this has not been uniform with the UAE, Qatar and Kuwait retaining their AA ratings from rating agencies.
In contrast, Saudi Arabia and Bahrain have been downgraded by three notches, and Oman four notches.
“Despite these downgrades, GCC countries maintain similar ratings to the best-regarded developed countries, which is largely a reflection of their comparatively small debt levels,” Samba said.
Reduced state oil revenues have led to a tightening of liquidity throughout the GCC and a rise in interbank rates.
Public deposits have been run down, and in some states liquidity has been further drained by the issuance of government debt, most of which has been taken on by commercial banks.
The situation should ease as oil prices recover and governments look to external sources to fund reduced deficits so as to avoid further tightening banking system liquidity and crowding out credit to the private sector, Samba said.